Pension plan ESG investments

Pension plan ESG investments

February 18, 2021 | By Keith Martin in Washington, DC

Pension plans may soon find it easier to make ESG investments.

After only several hours in office, the Biden administration took steps to roll back recent Trump administration limits on environmental, social and governance investments by US pension plans.

The Trump administration proposed barring pension plan investment managers from considering ESG factors, or investing in funds set up to make ESG investments, if the effect is to sacrifice return or take increased risk. The department made the proposal in July 2020 and then finalized it in early November, despite receiving 8,700 comments of which 95% were opposed to the new approach.

The prohibition took effect on January 12, 2021.

Biden immediately suspended it in an executive order listing regulations and other actions taken by the Trump administration in the last four years that conflict with his new policy priorities, including tackling climate change. The pension ESG regulation was the only US Department of Labor regulation called out for review.

Marjorie Glover, a pension and executive compensation expert in the Norton Rose Fulbright office in New York, said opponents of the ESG regulation are hoping that Biden will either withdraw or replace the ESG rule or issue guidance clarifying that ESG goals are pecuniary factors that may be considered by pension plan actuaries and that sustainable investment funds may be included as 401(k) plan default investments.

Although pension plans have the potential to become an important source of funding for renewable energy, projects accepting pension plan money must be careful to work around tax rules that deny investment tax credits and accelerated depreciation to projects to the extent they are owned by government or tax-exempt entities and to avoid becoming “plan assets” that could subject the projects to burdensome legal obligations under a 1974 law called the Employee Retirement and Income Security Act or ERISA. (For more detail, see “Pension Investments Bring New Opportunities and Some Challenges” in the February 2021 NewsWire.)